VCTs in the spotlight: Draper Esprit VCT

Venture Capital Trust funds (VCTs) are government-backed vehicles to help younger, and riskier companies raise money. They come with a 30 per cent income tax perk, which means when you invest £5k, you will get £1.5k back on your tax return.

Draper Esprit VCT, formerly Elderstreet Investments, will now be investing alongside Draper Esprit (one of Europe’s largest VCs) into fast-growth tech companies that have been born in the UK. It’s an exciting way to invest in tech, with added tax relief bonuses.

I caught up with William Horlick, Partner at Draper Esprit VCT to get the low-down on investing in VCTs, ahead of the tax year end.

What is a VCT?

A Venture Capital Trust (VCT) is a public company listed on the Stock Exchange run by a fund manager. It aims to make money by investing in small, unquoted, entrepreneurial companies and helping them grow. When you as a private investor buy shares in a VCT, you get access to a basket of small companies. These are usually riskier than established ones but can offer significant rewards. Not only might you invest in a rising star, but you could also receive valuable benefits along the way such as tax-free dividends and tax-free capital growth, as well as the upfront 30% tax reliefs.

Why would you invest in a VCT?

There's a couple of reasons including some limiting tax factors that are mainly driving VCT investing. Firstly, higher rate taxpayers and those who have reached the lifetime limit to invest in their pension, which is now capped tend to invest. And secondly, a big driver for retirement and younger investors alike invest for the potential tax-free income and the possibility of tax-free capital gains.

Are all VCTs the same?

There were many variants of VCT, but since the Patient Capital Review in 2017, most VCTs have focused on the fast-growing technology sector. Because of these changes enforced by new HMRC rules, many VCTs have had to adjust their investment strategy and hire new additions to their teams. The trick is to find VCTs that have not changed their investment style and have a track record of investing with an established team in this sector.

How do I know if a VCT is for me?

If you are looking for annual income with the chance of capital gain, a VCT could be for you. You should be prepared to hold your investment for a minimum of five years to ensure you do not have the initial 30% relief clawed back, as with all investing it makes sense to spread your investment across many VCT managers.

What are the risks?

Because you are buying into a portfolio of companies, the risk is spread across many companies within the fund and is, therefore, safer than investing in single companies directly. The VCT has an independent board who monitor the fund manager. VCTs have been around since 1998 and have proven to be a great addition to investors other investments.

Why is Draper Esprit VCT different?

In 2016, the Draper Esprit VCT signed a co-investment agreement with Draper Esprit PLC, a circa £500m market cap company listed on AIM. The VCT invests alongside the PLC and their separate EIS funds into VCT and EIS qualifying companies. This means that the group together can invest upwards of £10m into any one company with the VCT currently taking £1m of that allocation. Being able to invest £10m in any one deal across the group means the VCT is significantly different to others out there.

The Draper Esprit PLC main fund has had a track record of building its portfolio company NAV by 20% per annum for the last nine years. Coupling this track record of growth with a targeted annual 5% yield makes the Draper Esprit VCT a potentially attractive proposition.

What companies does Draper Esprit VCT invest in?

Draper Esprit VCT invest in exciting technology businesses that we think have the ability to grow into very valuable businesses. Companies like Graphcore, Revolut, Transferwise, UI Path, Perkbox are all in the Group’s wider portfolio. Now that the VCT has become part of the Draper Esprit family, we are now investing alongside the plc into such businesses.

Draper Esprit VCT has invested in entrepreneurs like Erik Fairbairn, CEO of Pod Point. Pod Point is a leading supplier of electric vehicle charge points. They also recently invested in Hadean, a company building an OS for the cloud. They are building the largest ever online battle with CCP Games, the creator of MMO Eve Online. Both pictured above.

How do you support the entrepreneurs you back?

When Draper Esprit as a Group invest, we don’t just invest the money and wait for our return. We join the team and take an active role on the board as the business scales. At the core of every investment decision we make is one simple question: how could we add value?

We are also the European arm of the Draper Venture Network, helping our companies with rapid, international growth. Founded by Tim Draper, the network spans from Silicon Valley to China, from Brazil to Japan. If you’re a tech company, your market is a global one. We help companies scale and also facilitate meetings with large corporates that are sometimes hard for early stage companies to get in front of.